Category Archives: first-time homebuyers

Young would-be home buyers are still sitting on the sidelines of America’s housing market, with first-time homebuyers representing a decades-low share. Student loans, high prices and low credit scores have all been blamed for this, but Bank of America recently proposed a different explanation.

“Seventy-five percent of first-time buyers would prefer to bypass the starter home and purchase a place that will meet their future needs, even if that means waiting to save more,” the bank says. “Thirty-five percent want to retire there.”

Loans For Nearly Every Credit Level

When asked why they haven’t bought a home, 56% told researchers, “I don’t think I can afford a home or the type of home I’d want.”

California loan agent and housing expert Logan Mohtashami said he’s seen evidence of this in his own sales. Younger folks are looking for larger homes, he said, specifically “more three-bedroom detached homes. That means no condos for them.”

But while patience is a virtue, so is facing reality. There’s a chicken-and-egg problem with claiming that would-be buyers are simply waiting and saving: There are very few starter homes for them to buy. Would these young people feel differently if they actually had options?

To understand the question, let’s back up a bit and get into the numbers.

The housing market is hot — home price listings are up 9% nationally from one year ago, according to Realtor.com. But the market is still broken. Only 30% of homes are being sold to first-time buyers, when the historic rate is 40%, according to the National Association of Realtors (NAR). The absence of (mostly) young first-time buyers creates problems all the way up the housing market food chain, making life difficult for families looking to sell and trade up while turning millennials into a generation of apartment dwellers.

Or perhaps it’s not really a problem. It’s possible some homeownership attitudes are changing, and trading up is becoming a thing of the past. Older generations were very comfortable buying smaller homes and moving as their families grew. Today’s buyers are used to much larger homes — the average home built in 2016 is 2,500 square feet, compared to 1,500 square feet in the 1970s, Mohtashami said.

Meanwhile, long-term trends suggest that Americans — both first-time buyers and trade-up buyers — are staying in their homes longer. A study by the National Association of Home Builders shows families moved after 11 years in 1987, on average, but stayed 16 years in 2011. The research is skewed by the housing recession, but the long-term trend is still for buyers to stay in their homes longer.

Maybe we should call millennials the “one and done” crowd.

But back to the chicken-and-egg problem. First-time home buyers have an average student loan debt of $25,000, according to NAR, which puts a serious damper on home-buying dreams. NAR thinks that debt delays saving for a down payment by an average of three years.

But debt is only one of the obstacles young people face.

“There are several reasons why there should be more first–time buyers reaching the market, including persistently low mortgage rates, healthy job prospects for those college-educated and the fact that renting is becoming more unaffordable in many areas,” said Lawrence Yun, NAR chief economist at NAR. “Unfortunately, there are just as many high hurdles slowing first-time buyers down. Increasing rents and home prices are impeding their ability to save for a down payment, there’s scarce inventory for new and existing homes in their price range, and it’s still too difficult for some to get a mortgage.”

Where Are All the Starter Homes?

The disappearing starter home is one element of the equation that some have overlooked, but it’s critical. Five minutes on any realty website can offer a tough dose of reality to anyone dreaming of buying a first home.

Sales of $200,000-and-under homes dropped the past two years, according to RealtyTrac. And many of the existing cheaper homes — often made available through foreclosure during the recession — have been snapped up by investors and turned into single-family rental units. A report last year from Harvard’s Joint Center for Housing Studies found that the recession added 3.2 million more single-family home rental units, “unprecedented” growth in this part of the market.

Then there’s the new construction problem. Builders just aren’t building $200,000 homes right now for a simple reason: Larger homes mean larger profit margins. BuilderOnline.com did a great job of breaking down the math in a story last year:

Making a $200,000 home work as a home builder is junior high–level arithmetic. Solving for profit — say, 20% — land and building direct costs cannot exceed $160,000. Problem is, a 20% margin on a sub-$200,000 house has become frighteningly elusive in the past decade.

The lowest build cost is around a $50 a foot,” says David Goldberg, a home building and building products manufacturers analyst for UBS, New York. “If you do a 2,000-square-foot house, which is what you’d have to do to compete with existing stock, that leaves you with $100,000 of sticks-and-bricks cost. The maximum cost on the land would be $60,000.”

So back to the original proposition: Are young people staying in apartments or living with their parents because they are patient or because they are hopeless? The answer, no doubt, lies somewhere in the middle. But when young people say they are simply waiting until they can afford the home they want, you have to wonder if they are being patient or simply sparing themselves the heartache of shopping for a unicorn.

If you’ve been searching for a new home, whether to buy your first or “trade up” into a larger or fancier home, chances are you’re having a hard time finding suitable options. That’s because availability of starter (median price $154,156) and trade-up (median price $267,845) homes on the market has decreased over the past four years all across the country, according to a new quarterly report on the supply and affordability of homes.

The Trulia Inventory and Price Watch found that increases of premium home prices (median price $542,805) are strongly correlated with a drop in the number of trade-up homes on the market, while a larger share of homes owned by investors is likely affecting the supply of starter homes.

“America is experiencing a housing shortage,” the report concluded. “Not only are there fewer homes available to buyers of all income levels, those just starting out or making their first foray into home ownership are worse off than they’ve been in years. There are fewer homes available, an even if they can find a home, it’s likely to be more expensive.”

Starter & Trade-Up Inventory Down More Than 40%

The low inventory is taking a toll on the affordability of all home segments, but especially starter homes, Trulia found. At the bottom of the housing market in 2012, starter homes were nearly affordable, the report showed, primarily because starter prices were discounted: homebuyers needed only to shell out 32.2% of their income to buy the median priced starter home. Now, starter homebuyers would need to dedicate 37.7% of their income – a 5.6 percentage point increase, the Trulia report said. This is significantly more than the 2.6 and 1.4 percentage point increase in income that trade-up and premium homebuyers need to spend, respectively.

Over the past four years:

The number of starter homes on the market dropped by 43.6%, while the share of starter homes dropped from 30.2% to 27.7%. Starter homebuyers today will need to shell out 5.6% more of their income — based on the median income of start-up buyers — towards a home purchase than in 2012;

The number of trade-up homes on the market decreased by 41%, while the share of trade-up homes dropped from 27.2% to 26.1%. Trade-up homebuyers today will need to pay 2.6% more of their income for a home than in 2012;

The number of premium homes on the market decreased by 33.4%, while the share of premium homes increased from 42.7% to 46.2%. Premium homebuyers today will need to spend 1.4% more of their income for a home than in 2012.

Why Are Inventories So Low?

Trulia found three reasons why inventory is so low, especially for starter and trade-up homes: First, investors bought many of the foreclosed homes during the recession and turned them into rentals. Second, a larger share of lower-priced homes are still underwater compared to premium homes, which means that these homeowners are unlikely to sell and take a loss. Third, and most important, rising prices are creating homebuyer gridlock. In other words, the spread of home prices, specifically the growing difference between premium homes prices and trade-up home prices, is likely causing a decrease in trade-up home inventory.

Why does the premium price spread matter? The more premium home prices rise, the more difficult it is for trade-up homeowners to find a premium home that fits their budget. And if trade-up homeowners can’t find a home that fits their budget, they are less likely to sell their existing home.

“In fact, there is a strong correlation between growth in the premium home price gap and a drop in the inventory of trade-up homes,” the report said. “In other words, housing segments are intertwined. The more premium prices rise, the less likely existing trade-up homeowners will put their home on the market.”

Western States Hit Hardest

Across the 100 largest metros, 95 have shown a decrease in the number of starter homes over the past four years, the report found. Of the 10 metros that have seen the largest drop, all are in the West and South, the report found. The number of starter homes in Salt Lake City has dropped the most, from 1,243 to just 151 – an 88% drop in four years.

Nine of the 10 metros experiencing the largest drop in starter home affordability – which is affected by both the number of listings and home-buying demand – are located in the California. Starter homebuyers in Oakland, Calif., would have to spend nearly 70% of their income to afford a 30-year fixed-rate mortgage on a starter home, which is 29% more of their income than in 2012.

Demand for starter homes remains high because of strong job growth, the report said. Faced with growing demand and tight supply, prices of all homes in California have risen sharply over the past few years.
This means buyers must settle for smaller, less expensive homes than they might otherwise buy elsewhere.